Texas Supreme Court Holds That Insurers May Use Staff Attorneys to Defend Claims Against Insureds Provided That the Insurer’s and Insured’s Interests Are Congruent and the Affiliation With the Insurer Is Disclosed
April 14, 2008
The Texas Supreme Court recently held that liability insurers may use so-called "staff attorneys" to defend claims against their insureds if the insurer's interest and the insured's interest are congruent and the staff attorney fully discloses to an insured his or her affiliation with the liability insurer. Unauthorized Practice of Law Committee v. American Home Assur. Co., Inc., 2008 WL 821034 (Tex. Mar. 28, 2008).
The Unauthorized Practice of Law Committee began an investigation of whether a staff attorney and her firm were engaged in the unauthorized practice of law. The attorney's employer, an insurer, along with the law firm and another insurer, sued the Committee seeking a declaration that insurers' use of staff counsel and the attorney's practice as staff counsel do not constitute the unauthorized practice of law. The Committee counterclaimed for declaratory and injunctive relief. The claims against the law firm were non-suited; the court denied the insurers' motions for summary judgment and granted the Committee's summary judgment motion finding that the use of staff counsel to defend insureds is an unauthorized practice of law. The Court of Appeals reversed and the Texas Supreme Court accepted review.
The Texas Supreme Court considered how other jurisdictions dealt with the matter, as well as ethics rules from the State Bar of Texas and ABA, and noted that the issue is whether an insurer using staff attorneys in discharging its contractual duty to its insureds and defending claims that it would be required to indemnify is practicing law or defending its own interests. The Court noted three factors to be considered in determining whether a corporation engages in the practice of law by using staff attorneys to provide legal services to someone other than the corporation: 1) whether the insurer's interest served by the legal services is existing or only prospective; 2) whether the insurer has a direct, substantial financial interest in the matter for which it is providing the legal services; and 3) whether the insurer's interest is aligned with the person to whom it is providing legal services. Applying these factors, the Supreme Court concluded that a liability insurer is not engaging in the unauthorized practice of law by using staff attorneys to defend claims against insureds so long as the insurer's and insured's interests in the defense of the case are congruent.
The Committee argued that the insurer's control of the defense creates ethical problems. The Supreme Court noted that the Committee could not cite any empirical evidence showing any actual injury to a private or public interest caused by a staff attorney's representation of an insured, which the Court found to be important because insurers have used staff counsel across the country for decades. The Court concluded that the use of staff attorneys to defend an insured is permissible, provided the insured's and insurer's interests were aligned and where the staff attorney discloses his affiliation to his clients.
